CARICOM could soon have a new energy champion


The following is an opinion piece by Arthur Deakin 9 (Extracted from Caribbean News Global)

Within 24 hours, Mike Pompeo made history by becoming the first US Secretary of State to visit Guyana and Suriname. He arrived and left both countries on September 17, announcing bilateral agreements to develop infrastructure, combat the movement of illegal drugs and strengthen trade and investment.

More importantly, the fundamental reason behind Pompeo’s visit was to shore-up support against the dictatorial Maduro regime in Venezuela. As the United States elections surface on the horizon, president Donald Trump is trying to narrow Joe Biden’s lead in key battleground states with large Hispanic electorates. In addition to recent Cuban sanctions, Trump knows that most Hispanic voters will approve of a tighter noose around Maduro’s administration. His strategy appears to be working. Compared to 2016, Trump has reduced the democratic lead among Hispanic voters by eleven percentage points in Florida.

Guyana, who has a decades-long unresolved border dispute with Venezuela, is happy to comply with the US wishes by jointly cracking down on Venezuelan narco-traffickers. Despite Venezuela’s inability to mount a serious military offense to contest the shared border, their unwillingness to participate in the border case being discussed in the International Court of Justice is frustrating the Guyanese government.

Suriname, on the other hand, has a more fraternal relationship with Venezuela, serving as a route for illegally mined and smuggled Venezuelan gold. Suriname’s reliance on those illicit funds, and their tight relationship with the Chinese, may strain their cooperation with the United States.

Pompeo also made the trip to Suriname and Guyana to ensure that US companies benefit from the up-and-coming energy sectors in both countries. Despite Suriname being in the exploration phase, US oil company Apache, in collaboration with France’s Total, has had three major offshore findings in Block 58. In the recent Caribbean Oil and Gas Conference, Sonya Boodoo, with consultancy Rystad Energy, estimated that Suriname has 1.4 billion in recoverable barrels of oil. If the projects in Block 58 are approved, peak capacity could reach 450,000 barrels per day.

In Guyana, the picture is much more advanced. Led by US oil giant ExxonMobil, the country has unveiled 8.3 billion barrels of recoverable oil, and counting, off the coast of Georgetown. At peak capacity, Guyana will produce 1.4 million barrels of oil per day, making it the 18th largest oil producer in the world. If oil continues to be priced at U$40 a barrel, Boodoo estimates that the profits distributed to the Guyanese government will reach U$96 billion, over 20 times the size of its GDP in 2019. These oil findings are astronomical for a country of 780,000 people.

The increasing oil production in Guyana has led the World Bank to estimate that Guyana’s economy will grow 51 percent in 2020, compared to a -5 percent decline for both Suriname and regional neighbor Trinidad and Tobago. Suriname does not have oil production to offset the loses brought on by the pandemic, while Trinidad and Tobago’s production has been mostly declining since the 1980s. Trinidad’s over-reliance on oil and gas to balance its budgets is reflected by a consistent decline in GDP since 2016, when the price of global commodities dropped.

Both Guyana and Suriname can avoid some of Trinidad’s mishaps by strengthening their institutions, improving their regulatory frameworks, and developing traditional sectors such as mining and agriculture. Less traditional sectors such as construction, tourism and real estate should also be fostered.

Guyana is already learning that oil cannot be its sole economic driver. 15 percent of Guyana’s recently found resources at the bottom of the ocean will be natural gas, which can be compressed, transferred, and used to power thousands of homes on shore. By introducing a gas-to-power project to the energy grid, the Ali administration will get closer to its target of cutting energy costs by 60 percent. A petroleum task force is being established to explore the possibilities of bringing natural gas to shore, as the government seeks to diversify and expand the grid’s capabilities.

The energy framework around both Suriname and Guyana also needs to be improved to attract additional capital investment and transparently manage the upcoming billions of dollars in oil revenue.

The InterAmerican Development Bank (IDB) recently urged for the creation of a strong, independent regulatory agency for Guyana’s oil sector, to ensure that the oil windfall is not squandered. The broader legal framework for the sector is also underdeveloped, as it lacks a local content law, stronger environmental management policies and simple disclosure and accountability requirements. Although the government is working on some of these issues, they need to act with urgency to maximize the benefits from the sector. Simply calling for the renegotiation of the Production Sharing Agreements with ExxonMobil, without addressing the fundamental structural flaws in the sector, is counter-productive to the long-term growth of Guyanese society.

In Suriname, the regulatory framework is less robust, and it faces the looming presence of 100 percent state-owned oil firm Staatsolie. Like any government-owned company in a developing country, Staatsolie is filled with cronyism and a lack of oversight. The company’s supervisory board is composed of the vice president’s brother and the president’s wife, who does not reach the 35-year-old threshold for a board member. Staatsolie also holds a 20 percent stake in all oil projects, which dilutes foreign investment, and they recently purchased a 30 percent stake in the country’s largest gold mine.

This is despite them being an oil company. For Suriname to have a successful oil sector, they need to partially privatize Staatsolie or carry out structural reforms within the company. By doing so, they will allow for a more transparent, competitive, and productive oil sector that is not restricted by a mismanaged government player.

Trinidad and Tobago is at a different stage of its energy development, similar to an aging company that needs to reinvent itself. For Bill Gates’ Microsoft, it was becoming a provider of cloud-based software services rather than exclusively offering its Windows operating system for computers. For Trinidad and Tobago, it will be the reduction of fiscal and regulatory barriers. It is an announcement to change the threshold of its Supplemental Petroleum Tax (SPT), from U$50 a barrel to U$75 a barrel, will encourage new investment and exploration.

Despite clear differences between the country’s energy sectors, there will likely only be one true “champion” among the three jurisdictions. This will be the country that is able to create a balanced regulatory environment that is beneficial to its people, but that also strongly incentivizes foreign companies and investors to devote their resources to develop the country. Only then, will a champion be crowned. (Caribbean News Global)